Relevant Cost - Make or Buy Part 2 Solutions

How it ends....

Finally the saga between Lebai Mat and Pak Man has ended. What will happen to Pak Man? How Lebai Mat handling the situation? Click the video for the exciting solution between those two.

Relevant Cost - Make or Buy Part 1 Solutions

Assalamualaikum and dear students,

At last the solution foe the Part 2 saga has been completed. Please be reminded that, there is a slight change in thee question regarding the labour hours. It should be 0.5 for Songkok and not 0.25 as stated. Just change the number and you will know when you watch the video later on.

Enjoy the video!

Relevant cost - Make or Buy

The saga between Lebai Mat and Pak Man regarding the make or buy decision. Will Lebai Mat able to calculate the relevant cost of his production? Will he accept the offer made by his old rival Pak Man? Should they reconcile between them under the name of relevant cost?

Don't miss the exciting video specially made for you.....

Relevant Cost - The saga continues....

Assalamualaikum guys,

This is the second part of the question pertaining to the relevant cost. Kindly download the question. FYI, this question is independent from the previous but you can use the previous as a guide. Since I did the question earlier, before the announcement of the stimulus package then there is no Makcik Kiah participated in this exercise. Blame the PM not me! Now she is happy but not Pak Man nor Lebai Mat.

Download this and no more discussing who will get Makcik Kiah!

Lebai Mat vs Pak Man Part 2

Relevant Cost - Exercise

Lebai Mat vs Pak Man

Part 1

Assalamualaikum and dear students

As we are in the 'lockdown' period, I hardly suggest that you initiate your own revision by looking for exercises in my blog or any other relevant blogs. I will post a video for the solution later but please do on your own before watch them. As such, please subscribe my channel to show your support. Remember, the marking scheme will be tight!

This is just an exercise, don't you ever think that this is the exam question.....hahahaha!

Lebai Mat and Pak Man

Exercise - Cost Volume Profit Analysis and Relevant Cost

QUIZ 2 – COST VOLUME PROFIT ANALYSIS AND RELEVANT COST

Whynot the owner of Cannot Café is considering to produce a variety of pizza namely Apanama, Apadia and Apatu. Every pizza has its own selling price and cost based on their own machine capacity. Below are the information obtained regarding the said pizza;

	Apanama	Apadia	Apatu
Production units	9000	6000	5000
Sales (RM)	RM72,000	RM60,000	RM35,000
Variable cost	27,000	15,000	9,000
Fixed cost	24,000	30,000	16,000

The fixed cost consist of the rental of machines and the salary of designated chef for each pizza. The sales mix is expected to remain steady for the next 3 months.

Required:

1) Prepare the cost per unit for each of pizza for current production and sales.

2) How many pizza should Whynot produce in order to break-even (to the nearest figure)

3) Calculate the break-even point for each of the above pizza.

4) Prove your calculation in Ringgit Malaysia for the break-even point as mentioned in no.2 and no.3 above.

5) Say, Whynot wanted to achieve a target profit of RM10,000, how many units
should he produce in order to achieve the desired figure?

6) Considering a production of a new pizza ‘Apadehal’, Whynot is targeting a sales of 5,000 units at RM8 per piece. Dreaming to achieve the target profit even further RM5,000 from the original target, the variable cost of this special pizza is half from the selling price and the fixed cost is estimated to be RM20,000. Should Whynot proceed with the plan and why not?

or else you can download and print this Quiz 2 - CVP Analysis and Relevant cost

Relevant Cost - Keep or Replace

RELEVANT COST – KEEP OR REPLACE

Faridzwan drives and owns his own taxi cab (Grab). He is considering replacing his old cab with a new more efficient hybrid model. Below is some information related to the decision.

	Old Cab RM	New Hybrid Cab RM
Original cost new	25,000	30,000
Accumulated depreciation	5,000
Salvage value	10,000
Annual operating cost	20,000	15,000

He expects both his old cab and the new hybrid cab would be useful for 6 years from now.

Required:

Determine the advantage or disadvantage of purchasing the new hybrid cab

Relevant Cost - Special Order

RELEVANT COST – SPECIAL ORDER

The Irman Corporation makes small decorative lamps. These lamps have the following cost structure.

Selling price	RM20.00
Variable cost per unit	RM13.00
Fixed cost per unit	RM3.00

The regular production is 20,000 units per month. The maximum number of lamps can be produces in the plant is 32,000 per month.

A foreign company has asked for a special order of 5,000 units at a price of RM15.00 per unit.

Required:

Should Irman Corp accept the special order? How much additional income will be materialized by taking the offer?

RELEVANT COST – SPECIAL ORDER

The Shitah Company makes special paper pants. These pants have the following cost structure.

Selling price	RM7.00
Variable cost per unit	RM3.50
Fixed cost per unit	RM1.75

The regular production is 8,000 units per month. The maximum number of pants can be produces in the plant is 10,000 per month.

A foreign company has asked for a special order of 1,000 units at a price of RM6.00 per unit. An additional shipping cost of RM1.00 per unit will be incurred of the special order is accepted.

Required:

Should Shitah Company accept the special order? How much additional income will be realized by taking the special order?

RELEVANT COST – SPECIAL ORDER

The Nsahsna makes small miniature toys from cloth. These toys have the following cost structure.

Selling price per unit	RM15.00
Direct material per unit	RM4.00
Direct labour per unit	RM1.80
Variable overhead per unit	RM1.20
Fixed overhead per unit	RM1.00
Variable selling expenses per unit	RM1.50

A foreign company has asked for a special order of 500 units at a price of RM10.00 per unit. Nshasna has the excess capacity to complete this special order withour impacting regular production. No selling expenses will be incurred for the special order.

Required:

Should Nsahsna accept the special order? How much additional income will be realized by taking the special order?

RELEVANT COST – SPECIAL ORDER

Kathy Company manufactures and selss a single product called a Yow. Operating at capacity, the company can produce and sell 45,000 Yows per year. Cost associated with this level of production and sales are as follows:

	Per Unit RM	Total RM
Direct materials	22	990,000
Direct labour	12	540,000
Variable manufacturing overhead	4	180,000
Fixed manufacturing overhead	14	630,000
Variable selling overhead	8	360,000
Fixed selling overhead	9	405,000
Total Cost	69	3,105,000

The Yows normally sell for RM75 each. Fixed manufacturing overhead is constant at RM630,000 per year within the range of 35,000-45,000 Yows per year.

Required:

Next year, Kathy Company expect to sell only 40,000 Yows. A large retail chain has offered to purchase 5,000 Yows if Kathy is willing to accept a 20% discounts from the regular price. There would be no sales commission on this order, and thus, variable selling expenses would be slashed by 75%. However, Kathy Company would have to purchase a special machine to engrave the retail chain’s name on the 5,000 units. This machine would cost RM40,000. The company has no assurance that the retail store would purchase additional units at any time in the future. Determine the impact on profits next year if the special order is accepted. (Show your workings)

Relevant cost - Make or Buy

RELEVANT COST – MAKE OR BUY

The MotorGo Corporation makes steering wheel covers for cars. These steering wheel covers have the following cost structure.

Units produced	5,000 units
Variable cost per unit	12.00
Fixed cost per unit	4.00

The Auto Fun Corporation has offered to make the steering wheel covers for RM15.00 each. If the offer is accepted, the variable costs will be eliminated but the fixed costs will remain.

Required:

Should MotorGo accept the offer? How much additional income will be materialize by taking the offer?






RELEVANT COST – MAKE OR BUY

Teha Kasut manufactures a variety of athletic shoes. The company always produced all necessary parts for its shoes, including laces. Lita Tali, an outside supplier has offered to produce and sell laces to Teha Kasut at a cost of RM0.20 per lace.

To evaluate this offer, Teha Kasut has gathered the following information relating to its own cost of producing laced internally:

	Per Unit RM	26,000 laces per year RM
Direct materials	0.06	1,560
Direct labour	0.07	1,820
Variable manufacturing overhead	0.02	520
Fixed manufacturing overhead, traceable	0.03	780
Fixed manufacturing overhead, allocated	0.06	1,560
Total Cost	0.24	6,240

One-third of the traceable fixed manufacturing overhead relates to supervisory salaries. The supervisor would be fired if Teha Kasut chose to purchase from outside supplier. Two-thirds of the traceable fixed manufacturing overhead relates to depreciation of lace-making equipment that has no resale value.

Required:

1. Assuming that the company has no alternative use for the facilities that are now being used to produce the laces, should the outside supplier’s offer be accepted? (Show your workings)
2. Suppose that if the laces were purchased, the company could use the freed capacity to make a new product. The segment margin of the new product is expected to be RM1,000 per year. Should the company accept the offer to buy the laces for RM0.20 per lace? (Show your workings)

RELEVANT COSTING - Add or Drop (Department/Service)

Add or Drop Decision

A decision whether or not to continue an old product line or department, or to start a new one is called an add-or-drop decision. An add-or-drop decision must be based only on relevant information.

Relevant information includes the revenues and costs which are directly related to a product line or department. Examples of relevant information are sales revenue, direct costs, variable overhead and direct fixed overhead. Such decision must not be based on irrelevant information such as allocated fixed overhead because allocated fixed overhead will not be eliminated if the product line or department is dropped.

The following example illustrates an add-or-drop decision:

Example

A company has three products: Product A, Product B and Product C. Income statements of the three product lines for the latest month are given below:

Product Line	A	B	C
Sales	$467,000	$314,000	$598,000
Variable Costs	241,000	169,000	321,000
Contribution Margin	$226,000	$145,000	$277,000
Direct Fixed Costs	91,000	86,000	112,000
Allocated Fixed Costs	93,000	62,000	120,000
Net Income	$42,000	− $3,000	$45,000

Use the incremental approach to determine if Product B should be dropped.

Solution

By dropping Product B, the company will loose the sale revenue from the product line. The company will also obtain gains in the form of avoided costs. But it can avoid only the variable costs and direct fixed costs of product B and not the allocated fixed costs. Hence:

If Product B is Dropped
Gains:
Variable Costs Avoided	$169,000
Direct Fixed Costs Avoided	$86,000	$255,000
Less: Sales Revenue Lost		$314,000
Decrease in Net Income of the Company		$59,000

Written by Irfanullah Jan

https://accountingexplained.com/managerial/relevant-costing/add-or-drop-product-line